Lessons from Lehman

That was the total compensation for Dick Fuld, the former CEO of Lehman Brothers, for 2007. It’s worth noting that $29 million of that was in stock options, which would end up completely worthless, but $5 million of it was in cash—and that’s a sum that many people would be happy to earn over a lifetime.

But now we’ve gotten to the good part: After such a colossal financial catastrophe, what have we learned?

Of course, hindsight is 20/20, but now that we have a clearer picture about what happened, we can have a better plan for how to approach events like this should they happen in the future…And the adage rings true: History repeats itself.

I wouldn’t say it’s good news, but it’s a game plan for the future. The downturn was painful for investors but it delivered some good lessons.

First, invest systematically in good companies regardless of the short-term investment climate. During the worst of the crisis in 2008, everything went down regardless of the quality of the underlying business. At the time, it felt punishing, but it was actually an opportunity to snap up shares of great undervalued companies.

The few contrarians who bought stocks while the market was tanking were able to ride the recovery all the way from the bottom. I’m not saying to try to time the market—that’s never a winning venture—but dollar-cost averaging—investing say $100 a month in a mutual fund no matter what—allows you divorce emotion from your investment discipline. There is wisdom in the saying…It’s not timing the market, but time in the market that pays off. And if you don’t have the stomach to buy at a bottom (and I understand that most people don’t), at the very least, don’t sell! A buy and hold strategy is best over the long-term.
Second, have a cash cushion. This is helpful for a number of reasons. A cash cushion can cover expenses should uncertainty strike. In addition, cash gives you the option to take advantage of buying opportunities. And don’t forget: What cash giveth, debt taketh away. While cash gives you options, debt limits them, so minimize debt.

Third, and finally, this too shall pass. As in life, it’s sometimes hard to see the light at the end of the tunnel. Consider this: Investors weathered the worst economic crisis in 80 years and it took just four years for stocks to return to all-time highs. If history has taught us anything, it’s that bubbles burst and markets recover.